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Symposium 2011

Solution for Coping with Systemic Risk

The Challenge

The global financial crisis has revealed how systemic risk in the banking system can lead to huge economic downturns. Many of the problems leading to the crisis have been discussed and many suspects h ...

The global financial crisis has revealed how systemic risk in the banking system can lead to huge economic downturns. Many of the problems leading to the crisis have been discussed and many suspects have been identified (including investment banks, central banks, rating agencies, regulators and the economics profession).

Central banks’ objectives should include not only price stability but also financial stability.

Financial stability describes a financial system’s ability to allocate financial resources efficiently, to assess and tackle risks reliably and to settle payments and securities transactions securely. Central banks should, therefore, aim to provide financial stability at all times.

But financial stability is less tangible than price stability. So it is of major importance to find a robust set of financial distress indicators that include bank- and system-specific variables. This will make it possible to identify asset price bubbles and act against them.

Under some circumstances, the objective of price stability may come into conflict with that of financial stability. Central banks should announce in advance how they intend to deal with such a conflict of objectives.

    Related Solutions

    Solution
    Symposium 2011

    Regulators should collect more data on financial transactions to assess the repercussions of financial defaults.

    Regulators should collect more data on financial transactions to assess the repercussions of financial defaults.

    Regulators should collect more data on financial transactions to assess the repercussions of financial defaults.

    Polity, Civil Society
    Solution
    Symposium 2011

    Regulate shadow banks along the same lines as commercial banks.

    Regulate shadow banks along the same lines as commercial banks.

    Regulate shadow banks along the same lines as commercial banks.

    Polity
    Solution
    Symposium 2011

    Find an internationally coherent definition of “systemic importance” (meaning “too big and complex to fail”).

    Find an internationally coherent definition of “systemic importance” (meaning “too big and complex to fail”).

    Find an internationally coherent definition of “systemic importance” (meaning “too big and complex to fail”).

    Polity, Civil Society
    Solution
    Symposium 2011

    Impose minimum standards on loans (loan-to-value and debt-to-income) to reduce excessive borrowing.

    Impose minimum standards on loans (loan-to-value and debt-to-income) to reduce excessive borrowing.

    Impose minimum standards on loans (loan-to-value and debt-to-income) to reduce excessive borrowing.

    Polity, Business